Have you ever been to a pawnshop? Pawnshops also play an important role in many communities by providing people with an easy, fast way to borrow small amounts of money. A flea market all rolled into one. But if you haven’t been to a pawnshop, you may be missing out on some great bargains. For a lot of people, there seems to be something, well, shady about these places. A pawnshop is a lot like a dozen garage sales.

People sell used merchandise. We’ll also look at the most commonly asked question about any pawnshop: “Is the stuff in here legit? You’ll realize that at the heart of a pawnshop is a fantastic lesson in economics! People buy new. Used merchandise.

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What’s the Deal?

­Pawnshops and pawnbroking have been around for thousands of years. The basic idea behind any pawnshop is to loan people money.

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The pawnbroker loans you money against that collateral.

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When you repay the loan plus the interest, you get your collateral back.

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If you don’t repay the loan, the pawnbroker keeps the collateral.

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As defined by the North Carolina General Statutes, 91A-3:*

Pawnbroker – Any person engaged in the business of lending money on the security of pledged goods and who may also purchase merchandise for resale from dealers and traders

Pawnshop – The location at which, or premises in which, a pawnbroker regularly conducts business

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Pawn or Pawn transaction – A written bailment of personal property as security for a debt, redeemable on certain terms within 180 days, unless renewed, and with an implied power of sale on default

*Pawnbrokers Modernization Act of 1989

In the next section we’ll discuss an example of a pawn shop transaction.”

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It’s a nice wedding ring — a standard gold ring with my wife’s name and our wedding date engraved inside. Bought new in 1994, the ring cost about $140.20 (that’s 2 percent interest plus 20 percent in fees on my $10) in 30 days to get the ring back. Within 30 days, I have three options:

I can return to the pawn shop and pay the full amount ($12.20 in this case) to retrieve my wedding ring.

I can return to the pawn shop and pay the monthly fee ($2.20 in this case) to extend my loan for another 30 days.20, (for a total of $14.88), while other pawnshops will allow you to continue paying 22 percent on the original principal.

I can do nothing, in which case the pawnshop keeps my ring and sells it.

That, in a nutshell, is the basic pawnshop transaction. In many communities, the pawnshop is pretty much the only easy way to borrow small amounts of money. A pawnshop is a quick, easy way to get a loan. A bank is not going to touch a small loan like that, and even if it did it would take a week or two to process the application. In a busy pawnshop, that sort of transaction happens hundreds of times every day. If you need $100 to make it through the week to your next paycheck, where are you going to get the money?

Of course, $2.20 fees due in (Going in yourkrabi.com) 30 days for a $10 loan is a pretty steep rate. Let’s take a look at how a business can legally charge that type of interest. Some of the details are absolutely fascinating! Pawnshops are specially licensed, and it turns out that they have to cooperate with police on a daily basis to prevent the movement of stolen merchandise. But unlike many other businesses, pawnshops have a special set of laws that keep them on the straight and narrow. That’s 264 percent per year!

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When you pawn an item, the pawnbroker takes your name and address, verifies it with your valid driver’s license and then inspects the item carefully. Most pawnshops have the ability to test diamonds and gold for authenticity. If there is a serial number on the item, it’s also recorded on the pawn ticket. In the next section we’ll examine the reasons a pawnshop must complete paper work on each item.” What does this mean? If a thief sells your stolen television to a pawnshop and you come in and see it the next day (and validate it with the serial number), the pawnbroker cannot tell you who brought it in, or even when the TV was brought in and sold. He must direct you to the police, who will investigate your claim. There are three reasons for this level of scrutiny:

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Every day, the pawnbroker must submit a list of all merchandise received, including serial numbers, to the police. If a stolen item is found in a pawnshop and the item was not reported to the police by the pawnshop when it came in, the pawnbroker can be charged with receiving stolen merchandise. Anything stolen is recovered this way and returned to the owner. Why do they do this? The police compare the serial numbers against records of stolen merchandise.

According to Ausley, a typical item pawned at a pawnshop has about a 60-percent chance of being reclaimed by the person who pawned it. This means there’s about a 40-percent chance that the pawnbroker will have to sell the item to recover the loan, so the item must be in a condition to be resold.

Unlike someone running a garage sale or a booth at a flea market, a pawnbroker is running a stable business in the community and has to worry about his or her reputation. However, a pawnshop can also tack on other charges, such as handling, appraisal, storage and insurance fees. In addition to the 20-percent cap (which does not include the 2-percent interest cap), there are the following total (interest plus fees) limits: Let’s say that you pawn your TV — the pawnshop has to hold it for a minimum of 90 days. This allows for any claims of stolen property to be investigated by the police. The unseen part is the storage area for all of the items in pawn. A pawnbroker cannot sell junk. That’s about the same as some credit cards. For those 90 days, your TV sits in storage. In North Carolina, the maximum interest rate that a pawnshop can charge is 2 percent per month, or 24 percent per year. The actual shop is twice as big as the part you walk around in. The maximum allowed charge for these additional fees is 20 percent per month.

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Third month – $75.00

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Fourth to six months – $50.00

­­In practical terms, this means that the maximum loan that someone can get at a North Carolina pawnshop is about $500. In North Carolina, you have to pick up the collateral and make a new loan on it after six months, or else the collateral becomes the property of the pawnshop (and the pawnshop can sell it). According to Ausley, the idea is to “loan out about one-third of what I think I can get for the item when I sell it.” If an item is priced at $100 new, and the pawnbroker thinks it will sell for $60 used, then the loan amount would be $20. The pawn ticket for this item would ask for $24.40 (2 percent interest plus 20 percent in other fees) in 30 days. Even with this regulated fee structure, the interest rate still works out to well over 100 percent annually.

Part of the art of being a pawnbroker is having a sixth sense about how much things are worth both new and used. The pawnbroker has real cash going out the door when he makes a loan, but has only the used merchandise to sell to recover that money if the loan is not repaid. “When you are starting out, there are books you can use, but those books are no good,” says Ausley. As an experienced pawnbroker, Ausley gets most of his information about prices by walking around stores and looking at catalogs, and also by talking with other pawnbrokers. When the economy is down, lots of people are pawning things and not many people are buying. This helps to explain the high interest rates to some extent. Used merchandise is not the Rock of Gibraltar when it comes to investment vehicles. The prices for new electronics are falling constantly, meaning that used prices are also falling. The real experience comes from buying and selling things every day. He’s been in the business for 15 years.

“An ideal customer is someone who comes in and pays the interest every 30 days, or picks up their item every month and repawns it if necessary,” says Ausley. People also come in and sell used items outright to the pawnshop. Some of the things you typically find in a pawnshop include:

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According to Ausley, “a pawnshop is a great place to buy jewelry!” You generally pay about half the retail value. Since jewelry is often the most valuable thing a person owns, it is one of the most commonly pawned items. Worried about authenticity? Bring an appraiser with you.

You will also find random things you might not expect to see at a pawnshop — saddles, for example. And wheel chairs, motorcycle leather, bicycles…

Often, a pawnshop has a specialty, and the shop sells new merchandise in that area. For example, Rick’s Music & Pawn sells both new and used instruments, speakers and other music-oriented items.

Anything of value that you can find at a garage sale is probably for sale at a pawnshop near you. Be sure to haggle!

For more information on pawnshops and related topics, check out the links that follow.

Pawning is the best option if you need money quickly or if the item you are selling is expensive and you need time to think about the sale. It is also a good option if you are selling an item that you might want to buy back.

What is the concept of pawn shop?

A pawn shop is a place where people can take their items of value and receive a loan in return. The item is kept by the pawn shop as collateral until the loan is repaid. The loan amount is based on the value of the item being pawned. If the loan is not repaid, the pawn shop has the right to sell the item to recoup the loan amount.

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More Great Links

National Pawnbrokers Association (U.S.)

National Pawnbrokers Association (U.K.)

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North Carolina Pawnbrokers Modernization Act of 1989

The History of Pawnbroking

Pawnbroking Facts